CBS, Time Warner Cable, and the Disruption of TV

Until the nineteen-eighties, American television was dominated by CBS, NBC, and ABC, broadcast networks so powerful that they were known simply as the Big Three. Then a new technology came along, one that gave viewers many more options to choose from, completely disrupting the way that people watched TV. It was called cable.

By 1991, when I published my book “Three Blind Mice: How the TV Networks Lost Their Way,” it was clear that the TV networks had largely ignored the cable threat until it was too late. In 1976, the average home had seven channels; by 1991, it had thirty-three. As viewers dispersed across a broadening array of cable channels, the Big Three’s audience shrunk: by 1990, cable revenues had soared to eighteen billion dollars, dwarfing the nine billion collected by CBS, NBC, and ABC.

Then Congress came up with a solution that would help the broadcast networks. Unlike cable, which enjoyed revenue from both subscribing customers and advertising, the broadcast channels were financed only by advertising. In 1992, Congress passed the Cable Act, which handed a second revenue stream to local broadcast stations, many of which were owned by or affiliated with networks like the Big Three. To insure that local stations would be carried on cable systems and that the local stations would continue to produce the news and some other programs in the public interest, Congress allowed the local stations to charge cable-system owners, like Time Warner Cable and Comcast, a fee called “retransmission consent” for displaying broadcast content. Soon, networks like CBS, NBC, ABC, and Fox hijacked most of that fee, claiming that since their programming comprised so much of the audience for TV stations they should be compensated. Before long, the networks were requiring their stations to pay them compensation for airing network programs.

A fight over the size of that fee is ostensibly the reason that, for the past two weeks, more than three million Time Warner Cable subscribers in New York, Los Angeles, and Dallas haven’t been able to tune into CBS or Showtime, which CBS owns. CBS insists that, as the top-rated network, it deserves to have its retransmission fee doubled; Time Warner Cable claims that if it surrenders to CBS it will have to bow to all the other networks when their contracts expire, pushing up customers’ already exorbitant monthly cable bills. Today the retransmission fees have swelled to three billion dollars annually, according to Richard Greenfield, a media analyst at BTIG Research.

What we’re witnessing are not the deliberate, calculated moves of two skilled chess players but, rather, two aging players who fear that their game is being disrupted. Thirty years ago, the traditional TV world was blindsided by cable; today, cable operators and traditional TV are both being blindsided by a new crop of technologies.

The list of these technologies is long. You can subscribe to one of two direct-broadcast satellite systems, DirecTV or Dish Network. You can get TV along with a speedy Internet connection through Verizon’s FiOS. A.T. & T. also buys some programming. You can download or stream many television programs and movies via Netflix, YouTube, Hulu, Apple, or Amazon. You can stream shows onto a video-game console. You can hook up to Google’s Chromecast, a small device that lets you beam content to your TV screen from other devices.

Then there are the DVRs and Tivos, which allow viewers to record shows and then fast-forward through the ads. The owner of Dish Network, Charles Ergen, has also introduced the Hopper, a DVR that deliberately does not record commercials. (The networks have challenged Ergen in federal court, and so far two courts have refused to block the service.)

You can even watch broadcast-network programs on Aereo, a new technology that picks up programs through over-the-air signals and, through the Internet, transmits them into homes for eight dollars a month. (If the courts continue to rule that Aereo is not pirating broadcast programs but, instead, is tapping into the free spectrum the government gave to broadcasters more than seventy years ago, this new platform will represent a serious threat to traditional TV players.)

All these options have changed how young people—the audience of the future—are watching TV. A 2010 study from the Kaiser Family Foundation found that in 2009 eight- to eighteen-year-olds spent an average of two hours and thirty-nine minutes a day in front of a TV set, down from more than three hours in 2004, as they’ve replaced traditional TV with DVDs, video on demand, and programs watched on computer screens or cell phones, among other platforms.

All of this is alarming to both cable providers and broadcast networks, which have operated for too long under the assumption that their business was nearly impregnable.

The cable industry, for its part, has been flush with cash for the past twenty-five years. As Jason Hirschhorn, a former MTV executive and a serial entrepreneur, put it: “MTV had profit margins like cocaine cartels.”

But now restless cable customers chafe at average monthly bills of more than seventy dollars, not including a broadband Internet connection. Cable bills rose by more than six per cent last year, according to the Federal Communications Commission, and higher retransmission fees could spur cable companies to raise their rates even more. Meanwhile, Time Warner Cable executives see that their subscriber base has begun to drop, as people go elsewhere for content.

Cable-system owners are so worried about losing their leverage as distribution platforms that some of them believe they should try to regain leverage by merging. Others argue that they should pull back on their relationships with broadcast networks and concentrate instead on the other part of their business: selling broadband-Internet subscriptions. Cable providers are already introducing tiered pricing, charging more for customers who download more data. But these ideas are still in their infancy, and they haven’t proven to be powerful enough to counter the threats to cable providers.

Broadcast networks are also challenged. For years, they enjoyed a gusher of dollars from retransmission consent, and advertisers were willing to pay more for thirty-second spots, even as network audiences dwindled. Why? Because the networks still assembled a mass audience. The networks and their corporate parents tapped other revenue sources, like Disney’s ESPN for ABC, Showtime for CBS, CNBC for NBC, and Fox News for Fox.

Today, broadcast networks like CBS take solace in being able to sell reruns of their programs not only to cable channels and local stations but also to digital platforms like Netflix, Amazon, Apple, and Google. But these new platforms don’t come close to matching the lucrative syndication fees once paid by local stations and cable networks. Plus, these new platforms are frenemies to the networks—business partners one moment and competitors the next, as they begin producing their own programs. And as networks sell more programs to these digital platforms, cable companies will increasingly protest that they are paying a hefty fee for exclusive programming that is no longer exclusive.

The networks bluster that if cable providers refuse to increase retransmission fees, they’ll stop delivering their over-the-air signals and transform themselves into cable networks, able to tap subscriptions along with ads. But Congress, which gifted them the spectrum space, is unlikely to allow them to abandon the free-TV model, and neither is the public, long accustomed to getting their content for free. “If it were so easy, broadcasters would have done it,” Greenfield, the analyst, says.

In the end, the challenge to the TV industry comes down to choice, just as it did thirty years ago. Today, a cable-and-Internet-connected home has thousands of choices. Armed with their remote controls and a mouse or a touch screen, consumers can choose what they want to watch, when to watch it, and which device to use.

With fall programming about to begin, it is likely that the blackout of CBS will soon end. Just the other day, a full-page CBS newspaper ad hinted at why. The ad proclaimed, “It’s Unfair. Time Warner Cable won’t let you see another Jets game this weekend.” With the football season about to start, Jason Hirschhorn observes, “There will be a riot if the N.F.L. is not on CBS.” But, whenever the blackout ends, the underlying upheaval that helped to cause it won’t go away.

Photograph by Camerique/Archive Photos/Getty Images.

Ken Auletta began contributing to The New Yorker in 1977 and has written the Annals of Communications column since 1993.